India inflation: Eight underutilised government tools

When the commodity prices sky-rocket or tumble down in physical and other markets, outcries gain din as stake holders, distributed across the value-chain start to fret. While many attribute the forces of markets playing it out, it is not something that has to be approached in a simplistic manner; especially when spike in prices can drive people to poverty.

Rising food prices have driven an estimated 44 million people (population that can roughly fill Poland) into poverty in developing countries since last June, said World Bank in a February report.

Spiralling fuel prices had recently caused (and is causing) equally spiralling inflation rates around the world.

And central banks in BRICS are hiking lending rates curbing growth in manufacturing and other service sectors.

Not a say-cheese scenario, right?

But the question is inevitable though it is has become a cliché: Is the India government doing enough to curb inflation especially since it wields the following eight tools to check it?

Are the tools being utilised in an effective and efficient manner to check prices?

The tools are:
--Export controls
--Import controls
--Procurement initiatives
--Freight rate manipulation
--Comex intervention
--Minimum Support Price
--Stock limit imposition
--Tax/tariffs
While infrastructure constrains are a given in the Indian economy and has to be addressed through long term measures, have the eight tools; which can be flourished almost instantaneously, been used well?

Martin Patrick, an economist based out of Kochi, comments on each the of the tools and how far the government has been successful in implementing them.

--Export/import controls: The government has failed to exercise export controls effectively in case of agriculture commodities. In case of imports, as the Indian rupee has appreciated, controls have been kicked in on that account. But that is hardly a policy intervention.

--Procurement initiatives & stock limits : The short-fall on these accounts are pretty serious. All of us know the state of affairs of FCI ware houses. There has been efforts to prop up the sector by allowing private participation as well. But this may not prove to be effective in reigning in inflation as private participation would Lead to a spike in storage costs. This would be counter-productive in controlling inflation.

--Freight-rate manipulation: Here, the government has been successful in positively manipulating the sector performance to the advantage of controlling inflation.

--Comex intervention: The government has been partially successful in this regard. It has controlled commodity prices by discontinuing futures in certain commodities like rice, Urad and Tur but has failed to curb action in other commodities.

--Minimum Support Price: The government has allowed for MSPs to maintain balanced levels.

--Taxes/ tariffs: The government can take bold initiatives in this regard, from which it is refraining.

“Inflation is not specific to a sector or commodity...” he said. “It touches each and every individual and has to be addressed in a holistic manner.” he added.

Lack of political consensus
When it comes to exports , there is also a lack of consensus across the political class, which is obviously discernible given the vote-bank compulsions. Chief Ministers of two states in India—Maharashtra and Gujarat—have recently lashed the government at the Centre for its export policies.

While Modi, the Gujarat Chief Minister punched the central government for its Cotton ban alleging that it resulted in losses to the tune of Rs7000 crore, Chavan, the Chief Minister of Maharashtra was concerned over the ban on onion and Sugar exports.

Even as the government allowed for export of the said commodities, lack of decisive consensus amongst the food ministry and agriculture ministry resulted in cancellation of a meeting of an empowered group of ministers (EgoM) who should have taken the decision regarding further easing of exports.

Expressing his displeasure over the strategy to ban export of sugar and onion, Chavan told Hindustan Times, “There is no quantitative restriction in imports under the WTO regime. Why should there be a ban on exports?”

And in case of MSPs, India's grain basket—Punjab-- has asked the Central government to raise the same to Rs.1800/ quintal as input costs for farmers have gone up. However, the Cabinet Committee on Economic Affairs approved the MSP for Rabi Crops of 2011-12 season to be marketed in 2012-13 with the MSP of Wheat been fixed at Rs.1285 per quintal, marking an increase of Rs.165 per quintal over the last year’s MSP.

This falls way behind the demand of Prakash Singh Badal's request of Rs.1800/quintal.

RBI hawkish
Meanwhile, the Reserve Bank of India (RBI) has hiked the repo rate by 0.25 basis points to 8.50% while also increasing the reverse repo rate to 7.50%. This is the 13th time since March 2010 that the RBI has hiked interest rates.

RBI has also lowered their Indian GDP forecast for 2011-12 to 7.6% from the previously high 8%. Inflation is meanwhile expected to moderate to 7% by end-March.

"The baseline inflation path still remains sticky and broadly unchanged from earlier projections. On the other hand, growth risks have increased on account of global headwinds and domestic factors. The pipeline of investment is likely to shrink, putting growth in 2012-13 at risk”, said an RBI report.

Industry reaction
Obviously, the industry is concerned:Industry chamber ASSOCHAM said the government’s monetary policy in recent months had negligible impact on food inflation and rather affected industrial growth.

“The government intervention in agriculture sector thus needs a complete overhaul with a fresh perspective at the highest level to tackle supply side constraints,” said Mr D.S. Rawat, secretary general of The Associated Chambers of Commerce and Industry of India (ASSOCHAM) when RBI hiked rates recently.

Food accounts for over 40 per cent of the Indian consumption basket. Since food consumption is inelastic to price rises, the government’s monetary policy had negligible impact on food inflation.

“Conventional monetary measures do not directly address the cause of inflation, but rein in inflationary expectations spiralling out of control by attempting to compress demand,” he said.

As published in: http://www.commodityonline.com/news/India-inflation-Eight-underutilised-government-tools-43226-3-1.html